Kroger Inc

Ticker: KR Buy below $25.

Why I Would Buy

1.       Cheap– Kroger trades at about 13x trailing earnings and 11x forward earnings.

2.      High RoE – Regular readers know that returns-on-equity is my favorite metric for picking stocks; Kroger has maintained double digit annual returns-on-equity during the past decade.

3.      Low Payout Ratio – Kroger pays about 2% dividend, but the payout is only about 20% of earnings.

4.      High Ratings –Both Morningstar and S&P rate the stock at 4 out of 5 stars.

What Could Go Wrong

1.       Highly Leveraged –Kroger has a large degree of indebtedness, more than that of its peers and more than I am comfortable with. Greater than 65% of the company’s capital structure is debt.  

2.      Low Credit Rating –This is related to the point above. Kroger has credit rating that is barely investment grade (Moody’s Baa1).

3.      Industry Risks – Kroger is grocery chain, selling groceries is a cut throat retail business with thin margins.

Disclosure: I am long KR, please read additional disclosures here before taking any action based on this post.

Aircastle Ltd

Ticker: AYR, Buy below $25.

Why I Would Buy

  1. Cheap– Aircastle trades at about 11x trailing earnings and 10x forward earnings.
  2. Concentrated Institutional Holdings –  More than 35% of outstanding shares are held by two large and savvy institutional investors: The Ontario Teachers’ Pension Plan Board and the Japanese conglomerate Marubeni.
  3. Dividends – AYR yield an attractive 4+%.
  4. Selling Below Book –Aircastle currently trades at 90% of its book value.

What Could Go Wrong

  1. Highly Leveraged –Aircastle like all leasing companies has a large amount of indebtedness. Greater than 70% of the company’s capital structure is debt.
  2. Significant Industry Risks – Aircastle structures it’s leases such that the cashflow from leases does not always the cover cost of their planes, Aircastle counts on being able to sell or re-lease their planes  at lease expiration. This may become difficult to accomplish if there is a prolonged downturn in air passenger or cargo demand, this can  occur due to any number of factors — higher fuel prices, global recession etc.

Disclosure: I am long AYR, please read additional disclosures here before taking any action based on this post.

Cohen & Steers Total Return Realty Fund

Ticker: RFI, Buy below $13.50.

Why I Would Buy

1.       Deep Discount– Cohen & Steers Total Realty Fund is a closed end fund that currently trades 8% below its net asset value (NAV).

2.      Generous Dividend – RFI sports a 7% dividend yield which is derived entirely from income and capital gains (return of capital is not part of the fund’s payout). The dividends are paid monthly.

3.      Low Expenses – The fund charges just 0.84% of assets as fees. In addition, the fund’s discount to NAV further diminishing the impact of these already low fees .

4.     No Significant NAV Erosion – Most closed end funds suffer deep erosion of NAV over its lifetime, in the case of RFI however this hasn’t occurred to any significant degree. The NAV at IPO in 1998 was $15, currently it is a little over $13, and this despite paying very generous dividends during the intervening 18+ years.

What Could Go Wrong

1.       Underlying Assets May Be Overpriced – RFI invests in REITs and other Real Estate related securities. REITs are currently at a market high, setting the stage for a possible correction.

2.      Interest Rate Sensitivity –  REITs are an asset class that is sensitive to interest rates and would likely suffer price declines during a rising rate environment. In addition, the fund utilizes leverage, which exacerbates it’s interest rate sensitivity.

Disclosure: I am long RFI, please read additional disclosures here before taking any action based on this post.

Enel Generacion Chile

Ticker: EOCC, Buy below $23.

Why I Would Buy

1.      Strong RoE – Enel Chile has generated double digit annual returns-on-equity during the past decade.

2.      Cheap – Trades at less than 9 times earnings.

3.      Dividend – Pays a 3+% dividend.

4.      Defensive Investment  – Regulated utility that generates and distributes power in large parts of Chile.

5.      Currency Diversification – Earnings are in Chilean pesos, this provides an hedge against the dollar via a relatively stable currency.  

 What Could Go Wrong

1.       Emerging Competition – Solar energy is emerging very strong in Chile with recent reports of surplus energy generation,  this could pressure Enel’s hydro-electric and coal-fired generation.

2.      Credit Ratings –  Credit ratings are on the lower side of investment grade (BBB+ by  Fitch and S&P).

3.      Controlling Interest  – Enel Italy owns 61% of this utility, interests of the parent may not always align with that of minority shareholders.

Disclosure: I am long EOCC, please read additional disclosures here before taking any action based on this post.

Magna International Inc

Ticker: MGA, Buy below $50.

Why I Would Buy

1.     Cheap – Magna trades at 8x current earnings and an astounding 5x forward earnings!

2.      Investment grade credit rating – Magna’s long term senior debt was already investment grade, it was recently upgraded another notch by Moody’s (from Baa1 to A3).

3.      Upbeat Analyst Consensus–5 star “strong buy” rated by S&P,  9.7  equity consensus score by Reuters’ (at Fidelity) .

4.      Low Debt – Just 25% of the capital structure is comprised of debt.

5.      Low Payout Ratio – Magna pays out less than 20% of its earnings as dividends.

 What Could Go Wrong

1.       Trump and NAFTA – About 60% sales of Magna’s sales is spread across Canada, US and Mexico, enough said!

2.      Highly Cyclical –  The automotive industry is highly cyclical, Magna is probably riding the crest of an industry peak right now ( the company lost money during 2009 recession).

3.      Meagre Returns of Equity – RoE is my favorite metric for picking stocks, Magna has earned anemic single digit returns on this metric.

Disclosure: I am long MGA, please read additional disclosures here before taking any action based on this post.